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The Aldrich plan

October 18, 2014

Aldrich-plan-1912

Aldrich Plan (1910)

Also in 1910, Senator Nelson Aldrich, Frank Vanderlip of National City (Citibank), Henry Davison of Morgan Bank, and Paul Warburg of the Kuhn, Loeb Investment House met secretly at Jekyll Island, a resort island off the coast of Georgia, to discuss and formulate banking reform, including plans for a form of central banking. The meeting was held in secret because the participants knew that any plan they generated would be rejected automatically in the House of Representatives if it were associated with Wall Street. Because it was secret and because it involved Wall Street, the Jekyll Island affair has always been a source of conspiracy theories. But the conspiracy theorists overestimate the significance of the meeting. Everyone knew Wall Street wanted reform, and the Aldrich Plan which the meeting produced was, in fact, rejected by the House.

The Aldrich Plan called for a system of fifteen regional central banks, called National Reserve Associations, whose actions would be coordinated by a national board of commercial bankers. The Reserve Association would make emergency loans to member banks, would create money to provide an elastic currency that could be exchanged equally for demand deposits, and would act as a fiscal agent for the federal government. The Aldrich Plan was defeated in the House as expected, but its outline became a model for a bill that eventually was adopted.

The problem with the Aldrich Plan was that the regional banks would be controlled individually and nationally by bankers, a prospect that did not sit well with the populist Democratic party or with Wilson. The Democrats and Wilson were not opposed to banking reform, nor were they opposed to a form of central banking. They were fearful that the reforms would grant more control of the financial system to bankers, particularly to the Wall Street crowd. They also remembered their history: the First and Second Banks of the United States were brought down in part by foreign ownership of the Banks’ stock, a fear of centralized power, and because the Banks competed with the private banks they were regulating. A return to central banking must not be accompanied by those features.

What eventually emerged was the Federal Reserve Act, also known at the time as the Currency Bill, or the Owen-Glass Act. The bill called for a system of eight to twelve mostly autonomous regional Reserve Banks that would be owned by commerical banks and whose actions would be coordinated by a committee appointed by the President. The Federal Reserve System would then become a privately owned banking system that was operated in the public interest. Bankers would run the twelve Banks, but those Banks would be supervised and by the Federal Reserve Board whose members included the Secretary of the Treasury, the Comptroller of the Currency, and other officials appointed by the President to represent public interests.

1909_editorial_cartoon_mocking_William_Howard_Taft,_Nelson_W._Aldrich,_and_Joseph_Gurney_Cannon_(Des_Moines_Register_and_Leader)

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